Problem 2Marty purchases two goods, food and clothing. He has a diminishing marginal rate ofsubstitution of food for clothing. Let x indicate the amount of food consumed and y theamount of clothing. Suppose the price of food increases from P, to P2. On a clearly labeledgraph, illustrate the income and substitution effects for each of the following scenarios:a) Food is a normal good.b) The income elasticity of food is zero (i.e. Marty's consumption of food does not changein response to his income).c) Food is an inferior good, but not a Giffen good.This question is based on problem 5.9 from Besanko and Breautigam. You can (but don't haveto) assume that Marty's consumer choice problem has an interior solution both before and afterthe price change.

Normal goods refer to those goods whose demand increases with the increase in the income of the…

Answered: Marty purchases two goods, food and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Now suppose that income goes up to 15oo. Illustrate how the budget constraint will change. If both goods are normal, explain where the new equilibrium will be (your answer might consist of a region of bundles, rather than just one bundle).
Question #3 Please explain what are the substitution and income effects (a detailed response is expected). Mark consumes two goods apples and oranges. If the price of orange increases from $2 to $4 and orange is an inferior good, please illustrate graphically the income and substitution effects. Please label your diagram carefully and provide explanation. Qd = 3300 – 2P and Qs = 500 + 8p Solve for: Price, Quantity and Market equilibria
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Suppose that, by law, a person is required to consume a fixed amount of good X, say X0. Assuming X is a normal good, explain how this law reduces utility for both high and low income people.
Consider the increase in the price of a can of soda and assume that soda is a normal good. Describe how the income and substitution effects impact on the demand for the cola if its price increases. Also describe how these two effects interact for inferior goods if there is a fall in the price of the good. Use bullet points
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8. Fabian consumes X and Y and the following utility function represents his utility: U = 2XY a. With a utility function of U = 2XY, Fabian's MU, = 2Y and his MU, = 2x ,where MU is marginal utility. Write an equation for Fabian's marginal rate of substitution (MRS). b. Suppose Fabian's income is $120 and Px = S6 and Py-$2, where Px is the price of X and Py is the price of Y. Write an equation for Fabian's budget constraint. c. Write the equation that equates the slope of Fabian's budget constraint to the slope of Fabian's indifference curve: d. If Fabian is spending all of his income, how much X and how much Y will he choose? Use the equations you wrote in part's b and c to answer this question. e. What will Fabian's utility be with this combination of X and Y? f. Now suppose the price of X increases to P.=10. Write the equation that equates the slope of Fabian's budget constraint to the slope of Fabian's indifference curve. How will this change the optimal combination of X and Y? What…
PROBLEM 3 – Slutsky Equation, Income Effect, Substitution Effect, and Total Effect There are two goods which quantities are to be denoted by x and y, while prices are denoted by px and py, respectively. There is a consumer whose income is to be denoted by I and utility by u. His expenditure function is known to be: *see image* Using slutsky equation, decompose the effect of an infinitesimal increase in Px on demand of good x.

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